Interactive Investor

This is why Tesco remains the one to beat

17th June 2022 08:43

Richard Hunter from interactive investor

It's the country's biggest supermarket, and these results show momentum spilling over into its first quarter. Our head of markets likes Tesco’s capital position and punchy dividend yield.

There was much to like in Tesco's (LSE:TSCO) full-year numbers in April and this latest update for the first quarter of its financial year shows that it has maintained the momentum.

Despite an increasingly inflationary environment and some normalisation of post-pandemic behaviour, the group has continued to ratchet up the pressure on rivals and has increased its market share within a notoriously competitive industry.

Like-for-like sales have increased by 2%, and by 9.9% compared to pre-pandemic levels. Some of the growth has been flattered by lockdown comparisons with last year, although this has been partially offset by inflation. Tesco Bank, meanwhile, is also showing some signs of further recovery with an increase in card sales and travel money helping the cause.

Its focus on value as well as quality is being well-received by customers, and its investment in themes such as the Aldi Price Match, Low Everyday Prices and Clubcard Prices are having the desired effect.

This could become something of a double-edged sword, however – the level of investment required to maintain its current position will be significant, especially with regard to its pricing position.

At the same time, the company recognises that it is far from immune from rising cost inflation, and is also aware of the importance of value to a consumer who is becoming increasingly squeezed as day-to-day budgets come under pressure from a potential cost of living crisis.

Inflation on the whole is a pressing global issue, although as a supermarket Tesco does retain an element of being a defensive stock, given the need for its products regardless of the wider economic backdrop.

In addition, its sheer scale also provides significant negotiating strength with its suppliers, which should help fight the battle with costs. Alongside a previously announced share buyback programme and a reduction in net debt, Tesco’s capital position is robust, while a dividend yield of 4.4% remains punchy even in light of a rising interest rate environment.

In all, Tesco remains the one to beat. Despite a challenging three months amid an increasingly squeezed consumer environment, the share price has still added 8.5% over the last year, as compared to a decline of 1.5% for the wider FTSE100.

Given its dominance in the sector, its ability to fend off competition and with the group showing few signs of easing off the pedal, the market consensus of the shares as a strong buy remains intact.

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